What Are the Different Types of Creditor Protection?

Malcolm Tatum

Creditor protection is often interpreted as a type of protection that helps to settle outstanding debt in the event that a creditor should be unable to manage the task, due to factors beyond his or her control. Protection of this type is sometimes marketed directly to consumers but at other times is also carried by lenders who wish to protect their investments in their clients and be prepared in the event of a sudden death or other events that would make collecting the outstanding balance due impossible. For this reason, there are several different types or forms of creditor protection available today.

Creditor protection may refer to prohibitions that prevent a creditor from seizing all of a debtor's financial assets.
Creditor protection may refer to prohibitions that prevent a creditor from seizing all of a debtor's financial assets.

Loan creditor protection is a type of preventive service that banks, mortgage companies, and other types of lenders often secure on each loan they choose to underwrite. The terms of the coverage normally include settling the outstanding balance due on the loan when specific events identified in the terms and conditions of the contract should come to pass. For example, if the debtor should die while the home mortgage has several more years before full payoff, the protection would provide the funds to settle that debt. The cost of the protection is often bundled into the fees assessed by the lender, and are calculated into the monthly mortgage payments that the homeowner remits up to the time that the covered event takes place.

Creditor protection can help debtors against harassment notices.
Creditor protection can help debtors against harassment notices.

Similar types of creditor protection are used when it comes to protecting business owners and other types of professionals in the event that certain events occur that make it impossible to continue remitting payments to their creditors. Plans of this type are focused more on settling debt should the covered party pass away, effectively preventing the need for creditors to file suit against the deceased’s estate in order to collect those balances due. In this scenario, the covered party secures the coverage personally and maintains it over the life of each debt obligation. This type of coverage can be a great benefit to loved ones who are left behind, since settling the financial matters of the estate will be simplified.

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Some forms of creditor protection even allow the ability to accumulate cash value over time. This means that while enjoying the peace of mind that comes with knowing creditor accounts will be settled should an untimely event occur, the covered party may even be able to use the protection as a financial asset. While this is not always the case, such as when the plan has the policyholder named as the beneficiary, looking into this option is a good idea, especially for the self-employed and small business owners who want to make sure loved ones are left with little to no financial hardship to deal with while mourning their loss.

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